Real Estate Value on Net Worth Statement

[45th Birthday]

Like many here, I regularly calculate a net worth number, and I include the value of residential real estate. I have been giving those (realistic) values a 5% haircut to reflect Realtor commissions. Now I'm questioning whether that makes sense. Other items, like equities, are shown without commissions taken out, although they would be much less than 5%. Also, the Realtor commissions would only be a portion of closing costs. Am I overthinking this?

 

[COcheesehead]

I do it without commissions because the commission isn't "due" yet.

 

[Earl E Retyre]

I take 6% off to cover realtor fees + closing costs since it is a significant enough number.

 

[jazz4cash]

Yes overthinking if 5% is a significant difference either way. You can't know exactly what your home is worth at any exact moment.


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[dallas27]

Corp accounting rules say to value land at purchase price, not market value. Fwiw.


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[jebmke]

what is the purpose of a net worth statement - other than for estate purposes? I don't know how estate taxes deal with this - do they tax you on the net -- is the RE commission deductible for estate tax purposes?
For retirement assets I don't include anything that isn't liquid - convertible to cash reasonably quickly (say, 5 biz days) so real estate isn't included at all.

 

[CaliKid]

I do about a 10% reduction from what I think the real estate is worth since most people overvalue their own stuff.

 

[DrRoy]

Commissions on an investment sale are now a tiny fractional percentage of the sales price and can be ignored. I think you are reasonable to consider the overall cost of a real estate closing and deduct it.

 

[RE2Boys]

I include the property tax assessed value as a good approximation of what I may realize from sale of home.

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[W2R]

what is the purpose of a net worth statement - other than for estate purposes? I don't know how estate taxes deal with this - do they tax you on the net -- is the RE commission deductible for estate tax purposes?
For retirement assets I don't include anything that isn't liquid - convertible to cash reasonably quickly (say, 5 biz days) so real estate isn't included at all.

+1 It all depends on what you are using the net worth number for. I compute mine in the same way as jebmke computes his, so naturally that does not include real estate.

 

[rodi]

Intellectually I know real estate is part of my net worth - but since our rental and our primary home are on the same lot (and can't be subdivided) - and I'm not planning on moving... I tend to ignore the value. Like W2R and Jebmke - it doesn't factor in my planning.

When I do look at it - I take what Zillow says and knock 10-15% off the value... Zillow tends to be frothy in our area. Because I live in a pricey area that has appreciated significantly since we moved here- the number Zillow gives me is obscenely huge and I'd feel downright stinkin' rich if I included that amount in my financial plans.

 

[ElizabethT]

Unless one is planning to move to a less expensive home/location, and pocket the difference in the process, I'm not sure I understand the rational for including real estate in net worth calculations? It would seem to be a moot point for purposes of establishing a withdrawal amount, unless perhaps a reverse mortgage is part of the equation at some point?

Edit: I have seen mention of autos in net worth on occasion, which creates the same question, minus the reverse mortgage option. What is the point exactly, since one has to live somewhere and drive something?

 

[Sunset]

Unless one is planning to move to a less expensive home/location, and pocket the difference in the process, I'm not sure I understand the rational for including real estate in net worth calculations? It would seem to be a moot point for purposes of establishing a withdrawal amount, unless perhaps a reverse mortgage is part of the equation at some point?

Edit: I have seen mention of autos in net worth on occasion, which creates the same question, minus the reverse mortgage option. What is the point exactly, since one has to live somewhere and drive something?

I include everything when calculating net value for my own fun, to see the year over year change.

I exclude home and cars when calculating withdrawl rate.

 

[Another Reader]

Net worth is defined differently than net investable assets or the net assets that you would plan to sell to support yourself. Net worth is the value of all of your assets minus all of your liabilities. Realizable net worth is the value of your assets minus liabilities and the costs of asset sales. The cost of sale of most paper assets is negligible. Real estate selling expenses, not so much. Also other assets not easily sold often require discounts to sell them. Non controlling interests in businesses and properties come to mind.

I own rentals plus a primary house in Silly Valley and paper assets. To calculate realizable net worth, I deduct 10 percent from the market value of each property to account for commissions, repairs and maintenance, and closing costs. The value I deduct from is the value of the property assuming that repairs and maintenance but no major remodeling are done. I assume arms length, open market transactions, with a reasonable marketing time. Since I own a lot of real estate, net worth and realizable net worth are significantly different.

Assets you do not plan to sell are part of your net worth but are excluded from retirement income calculations. Liabilities against those assets have payments, and those payments are part of your necessary income.

 

[pb4uski]

I do it without commissions because the commission isn't "due" yet.

Agreed, in personal financial statements real estate would be presented at estimated fair value, but excluding the commission. If you list it and it sells, then the commission is owed and recorded,

 

[Souschef]

One caveat about estate tax valuation. On real estate the amount is what the real estate is worth, regardless of encumbrances (mortgage). That can get ugly

 

[clobber]

Like many here, I regularly calculate a net worth number, and I include the value of residential real estate. I have been giving those (realistic) values a 5% haircut to reflect Realtor commissions. Now I'm questioning whether that makes sense. Other items, like equities, are shown without commissions taken out, although they would be much less than 5%. Also, the Realtor commissions would only be a portion of closing costs. Am I overthinking this?

I'm not sure what you meant by "a portion of closing costs." It is ~5% of the purchase price which, as you are correctly wrestling with, eats into your potential take home and therefore could affect net worth. You know how people say that a car depreciates as soon as you drive it off the lot? I think the same of a house. If you buy one on Monday, you can probably only get 94-95% of your money back on Tuesday because of the fees.

I've never needed to be *that* accurate with my particular calculation. Does the 5% push you over/under a significant mark? Are you a millionaire if you don't count it, but are not if you do?

IMHO, people should be counting their home and vehicle (as mentioned) in their net worth - for multiple reasons. It makes it easier to compare apples to apples (if you need to compare). If you own a $500K house and you suddenly really need $250K, you could sell it and move into a cheaper place. The ability to do that is reflected in the net worth. Same for the car, if you own a $60K Lexus, you could sell it and buy a Honda and use the difference. So, it does matter. Also, if your net worth is $1M and you go buy a Ferrari, did your net worth just drop to $800K? No. Other numbers will include your net worth without home/vehicle.

As far as how to count the realtor fees, personally I do not.. What if you wind up doing a for sale by owner? Much lower fees there. What if you negotiate a lower rate?

Good question!

 

[meierlde]

One caveat about estate tax valuation. On real estate the amount is what the real estate is worth, regardless of encumbrances (mortgage). That can get ugly

It seems to be a that depends issue: https://www.irs.gov/instructions/i706/ch02.html#d0e3315
"
If any item of real estate is subject to a mortgage for which the decedent's estate is liable, that is, if the indebtedness may be charged against other property of the estate that is not subject to that mortgage, or if the decedent was personally liable for that mortgage, you must report the full value of the property in the value column. Enter the amount of the mortgage under “Description” on this schedule. The unpaid amount of the mortgage may be deducted on Schedule K. "
It turns out that on the form 706 the recapitulation handles debts of the decedent on a different form (schdule K) than schedule A for real estate, so that on the first page you enter the gross estate, then subtract the debts of the estate to reach the tentative estate value.

 

[triangle]

Personal home equity is part of one's net worth so I think it should be included in that calculation. I generally use the current tax value even though it is not precise.

But as others state, I focus more periodically determining the value of all assets other than the personal home, vehicle(s), jewelry, etc. Since a home is such a necessity and part of the person/family and is a source of expenses as much as it is an asset. I view home equity as something that will never recovered or spent during my lifetime unless there is a big emergency and all the other money runs out. But it is obviously important for estate planning purposes.

 

[Lucantes]

Net worth is defined differently than net investable assets or the net assets that you would plan to sell to support yourself. Net worth is the value of all of your assets minus all of your liabilities.

+1
I include the estimated value (conservative) of my primary home when I compute our actual "Net Worth" but it isn't included when I am calculating our "Net Investable Assets" and our subsequent retirement funding etc. If things got really tough however, we could always sell the home and move somewhere else (Our Plan Z I guess ).

 

[stepford]

I use nominal values in my net worth. So I include the full value of my tax deferred 401K and IRA even though I will only get to keep ~70-75% on withdrawal.

Similarly, I include the full value of my home in my NW. I yanked >$100K out of other accounts to pay off my mortgage on retirement and would like to think that that transfer didn't change my NW.

 

[NW-Bound]

Financially, what I care about most is the bottom line of my Quicken screen, which lists only investable assets and nothing about the values of my 2 homes. Yes, I know if I need money, I can turn them into cash, well at least one of them, but I am not broke and still want to keep both.

Right now, maintaining the homes is a major expense category. That's how I regard them, as a source of expenses and not as assets.

 

[calmloki]

I used to use what we had paid for places - after owning them for decades that became kinda absurd. Then went to what the property tax man calls "True Market Value" - which is maybe close to reality. That lets Quicken give us a net worth figure. I'm painfully aware that if we sell any of the rentals we are liable to realize somewhere around 70-80% of the sale price after sale expenses and Mr. Taxman hit us up, so if I fantasize having no rentals our net worth drops pretty hard. Our Quicken net worth also includes our residences, but I'm aware that we need shelter somewhere, so depending what I'm trying to answer (estate value or cash to get us to our graves) I add or subtract those values.

 

[traineeinvestor]

By definition "net worth" = all assets - all liabilities.

Like most people, I fiddle with this to produce the number that is most useful to us, and include the value of our real estate. Home equity is included because, even though we have no plans to sell, if the need ever arose, we could sell it and spend the money to support our lifestyle. We don't include (other) consumption items like the wine I have stored in a bonded warehouse, the value of a life insurance policy or the paintings on the walls.

We tend to use mortgagee values and update at year end (other assets and liabilities are done monthly) and don't account for realisation expenses on any of our assets.

Although not something an accountant would ever approve, for us it strikes the right balance between acting as a useful financial planning tool and not spending more time on the exercise than I have to.

 

[JohnT]

Online tools that track your net worth (notably Personal Capital) use market values from Zillow for real estate assets in the net worth calculation.
With 2 rental properties and a primary residence, this serves as a quick easy and consistent reference for these amounts, when calculating my net worth - and most useful to note any relative changes in value. So I use Zillow.